The Tallinn Stock Exchange opened on 31 May 1996, yet another sign of how Estonia’s economy had matured since independence was regained in 1991. Its founding built on the operations of the Central Depository for Securities.

The Exchange was founded by 22 shareholders, mostly banks but also securities intermediary firms, the Ministry of Finance and the Bank of Estonia.

All business is done by phone and reported to the Exchange electronically and the electronic system issues instructions to the Estonian Central Depository for Securities.

The TSE is a self-regulatory organisation and licensed by the Finance Ministry under the 1993 Securities Market Act which ensures the TSE operates to the highest international norms. All issuers and listed companies enter into a contract which reserves the TSE’s right to introduce new regulations and amend existing ones, closely scrutinise the integrity of all dealings and introduce sanctions when needed.

TRADING SYSTEM

The electronic trading system allows brokers to enter new quotes and orders and change existing ones from individual terminals. It ensures the flow of real-time information about the best prices available at the market and about the terms of the transactions concluded.

Clients and servers are connected by a dedicated frame relay network with virtual TCP/IP channels linking brokerage and Exchange LANs. Each TSE member’s terminal is connected to Exchange’s database server through which information of listed companies, member firms, market-makers, orders entered into the public order book, quotations, trades and their details, news and security statistics can be accessed. The communications server manages the connections with members. The broker terminal is fully compatible with Windows 95.

Great emphasis was put on security during the system’s development. Every trader has a personal password. Every message is encrypted and carries its source and destination addresses. Both are checked before the message is accepted. The TSE’s server has full audit trail capabilities and ensures the logging of all activities.

Because the trading system is organised in modules new system modules can be easily added without fundamental change. The next development stage will see automatic matching as a software function.

MEMBERSHIP REQUIREMENTS

Investors communicate with the Exchange via member firms.

Only those which have a securities intermediary license from the Finance Ministry and hold TSE shares can become members of the Exchange. An applicant’s share capital must be at least 400,000 EEK.

Member firms must employ at least one full-time approved trader. To become an approved trader a person must have a certificate of securities specialist and pass an exam on the TSE’s rules and regulations.

GUARANTEES AND TRADING LIMITS

Member firms which are not account operators at the Estonian Central Depository for Securities must have a bank guarantee. Total per-day transactions on the Exchange both for the member firm’s own account and its client’s must not exceed ten times the amount of the bank guarantee.

TRADING MODELS

There are two trading models.

DEALER MARKET

A security is traded on the dealer market when it has two recognised dealers. Security transactions are made through member firms registered as recognised dealers who regularly give bid and offer quotations.

If an investor or member firm which is not a recognised dealer wants to buy or sell securities a recognised dealer will do so on their behalf at the best displayed or a better price.

Member firms which are not recognised dealers must conduct all security transactions through a recognised dealer. A member firm which has received a client’s order can be a principal in the transaction or match two different clients’ orders only if it can offer a better price for that security than that displayed by the trading system.

PUBLIC ORDER BOOK

The public order book is used for transactions with less liquid securitied. When a security is trading on the public order book all member firms can enter limit orders into the trading system. Orders going into the system are displayed both at the minimum amount and its multiples.

Member firms must enter clients’ limit orders into the trading system immediately. Before doing so they must check for matching orders which would allow the client’s order to be effected at a specified or better price. If there is more than one order at the same price in the system the first one entered takes priority.

Member firms cannot display combined client orders in the trading system without all the client’s consent or the order is at a price below the minimum amount for that security. If order conditions allow, a member firm can partially execute orders.

TRANSFERRING A SECURITY FROM THE PUBLIC ORDER BOOK TO THE DEALER MARKET

The Exchange will transfer a security from the public order book to the dealer market if at least two recognised dealers register for that security.

STOCK EXCHANGE INDEX

The Exchange has established an index for listed shares’ price movements. Every share on the TSE index is weighted by its market value.

INFORMATION

Real-time price and transaction information is sent to Reuters and Dow Jones Telerate and posted on the Exchange’s web site, found at http://www.tse.ee.

INVESTOR PROTECTION

The Exchange’s Conduct of Business rules stipulate member firms, its employees and supervisory bodies follow principles of fair and equitable trading, act knowledgeably and with care, always giving clients’ interests the greatest priority. Member firms must execute client orders at the best possible price.

Should client/member firm conflicts arise a member firm will follow procedures:

• All complaints about the member firm will be registered by the member firm.
• The member firm will prepare a written report after any client complaint, detailing any corrective actions taken.

Should a client not be satisfied by the action taken by a member firm he or she has recourse to the Exchange’s Arbitration Court and the member firm must let the client know of this option.

CLEARING AND SETTLEMENT

A settlement report including all relevant account numbers and investor information will be issued by every member firm as a follow up to their trade report. The Exchange’s trading system is connected to the system of the Estonian Central Depository for Securities. All transactions are carried out on the basis of DVP at T+3. Member firms are held accountable for all their transactions.

GURANTEE FUND

A guarantee fund has been established with the Bank of Estonia (central bank). Before a member firm can begin trading it must contribute to the fund, established to cover expenses incurred by the Exchange in settling transactions.

DEFAULT PROCEDURES

At the end of trading on the day before settlement the Estonian Central Depository for Securities will check settlement details sent by member firms.

To guarantee settlements the Exchange reserves the right to the following procedures:

Settlement by a member firm

Should a member firm’s client not have the necessary securities at the end of a trading day S-1 broker’s account will be debited to the amount of securities in question on the settlement day and the money will be credited to the member firm. If an account operator has not confirmed a client’s purchase at the end of a trading day S-1 the Exchange will hold the member firm responsible for payment of the transaction and the member firm will receive the securities.

Automatic lending

Should a member firm not have the necessary securities in its account the Exchange has the right to use automatic lending to complete a transaction according to the procedures for securities lending. The member firm must return the securities by at least the fifth trading day following the automatic lending (T+5).

Buy-in

When automatic lending is not possible the Exchange may use a buy-in procedure. Should the buy-in price be higher than the contract price the guarantee fund will be used.

Guarantee Fund and sell-out

If lack of money causes a transaction to fail the Exchange can use the guarantee fund to close the deal and transfer the securities to its account. Should a member firm not return the money by the end of the third following trading day the Exchange has the right to sell the firm’s securities as collateral or realise its bank guarantee.

LISTING REQUIREMENTS

All security listings must be approved by the nine-person listing committee elected by the Exchange’s supervisory board. All listed securities must be dematerialised, freely negotiable and registered with the Securities Board of Estonia and the Estonian Central Depository for Securities.

Sponsor

A sponsoring member of the Exchange helps the company draw up listing particulars and must provide all pertinent information about a company being considered for listing. The sponsor must ensure the company meets all requirements for listing and that the company fully understands its obligations after being listed and the Exchange’s rules and regulations.

Requirements for Listing particulars have been drawn up according to EU norms. The requirements ensure investors proper and full information about companies and their financial health.

Listing Shares

Applications for listing must cover all shares of the same class. At least 25% must be distributed publicly.

Main list - The market capitalisation of shares, must be at least EEK 300 million. The company must provide their last three audited annual reports and show both a net profit and a profit from operating activities.

Secondary list - The market capitalisation of shares or if that can’t be assessed, the issuer’s equity capital must be at least EEK 10 million. The company must provide two years’ audited annual reports.

Listing Bonds

The issue’s total volume must be at least EEK 10 million and the application cover all bonds, ranked pari passu. To list corporate bonds the company must present two years’ audited annual reports and show a net profit for the year before.

Listing Fund Units

Fund units can be listed if their total market value is at least EEK 5 million. A company with a recently established fund will be accepted for listing if the listing committee is sure those making investment decisions have the necessary expertise and the fund’s investment declaration shows adequate risk diversification.

Listing Foreign Issuers’ Securities

Foreign issuers of securities must meet the same requirements as issuers in Estonia. The listing committee can allow exceptions to protect investors.

FREE MARKET

The Exchange has established a free market for trading securities which do not qualify for listing or for which an issuer has not yet applied for a listing. If at least three member firms apply, these securities will be entered into the free market. Securities must be registered with the Securities Board and the Estonian Central Depository to qualify for the free market.

All trading of free market securities is based on the public order book in accordance with the Exchange’s rules and regulations.

INFORMATION DISCLOSURE REQUIREMENTS

All listed companies must provide accurate information about their financial activities. It will immediately be fed into the Exchange’s information system.

Any company’s activities which might effect the price of its listed securities must be disclosed immediately. The members of the management and supervisory bodies of the issuer are required to assess all changes in the company to determine which information is to be disclosed immediately.

No person with confidential information can make transactions or give recommendations to others. Management and supervisory bodies, auditors and people connected to them cannot deal in the issuer’s securities from the end of the accounting period to a week after the publication of the reporting period’s financial results.

Financial Reports

Issuers must present reports to the Exchange about every three, six and nine months of the financial year as well as audited annual reports drawn up in accordance with Exchange rules, accounting legislation and International Accounting Standards. If an issuer is the parent company of other companies it must present financial statements for the whole group.

Changes in an issuer’s business activity

An issuer must inform the Exchange of all significant changes in its business activity

• significant fixed asset transactions
• major contracts signed
• investments outside the core business
• planned mergers, acquisitions, separations and reorganisations

SPECIAL REQUIREMENTS FOR THE ISSUERS OF SHARES

All issuers of shares are required to immediately inform the Exchange of:

• general meetings of shareholders, all materials related to it and dividends proposed at the meeting,
• business transactions between the issuer and a substantial shareholder or the management, the people connected with or companies controlled by them
• A shareholder which has acquired or disposed of shares and as a result that shareholder’s holdings exceed or fall below 5%, 10%, 20%, 50%, 1/3 or 2/3.

SPECIAL REQUIREMENTS FOR BOND ISSUERS

Bond issuers must immediately inform the Exchange of:

• a decision to not pay or only partially pay interest on listed bonds
• a decision to redeem listed bonds before their redemption date
• any new bond issue and any guarantee given on them

SPECIAL REQUIREMENTS FOR FUND UNITS ISSUERS

A fund’s managing company must publish the weekly net value of its funds units and inform the Exchange of:

• proposals to reorganise the fund
• the fund’s termination, suspension or liquidation
• changes to the managing company’s manage ment and supervisory bodies
• Securities Board decisions to revoke of suspend its license
• major changes to a fund’s investment strategy